This is the second session of the Stephen C. Freidheim Symposium on Global Economics.

This symposium will focus on the future of investment management in a world of low returns, the financial pressures felt by universities, states, and individuals around the world, and methods for adjusting to low returns on investments.

LEVI: Good afternoon. Welcome to the second session of the Stephen Freidheim Symposium on Economics. I hope you all enjoyed the first session—comedy hour and investment advice all rolled into one. We are on the record. We have Dannel Malloy, 88th—is that right—governor of Connecticut with us to talk about the challenges facing public pension plans. He and I are going to have a conversation for about the first half of this session and then we’ll open it up to members for their questions.

The governor was first elected in 2010 to a term starting in 2011, reelected in 2014 and has a little more than one year left in office. Connecticut is really an ideal state to be looking at here, both because it has big challenges and because it’s made important progress in recent years. It has a large challenge over time funding its public pensions. They’re roughly 50 percent funded, give or take, less? OK, less. (Laughter.) I the context of today’s discussion, a world of low returns, they are unusual for having made serious changes in the way they think about returns and use that to fund their funds. But they still have big challenges remaining and we’ll talk about—we’ll talk about all of that.

But I want to start just by setting the stage. You have a range of funding situations for public pension plans across the country. Connecticut’s is relatively unfavorable. Give us a sense of how Connecticut got to where it is, or particularly where it was when you took office, and the politics of that. How did—how did Connecticut end up with such an underfunded pension system?

MALLOY: Well, a couple of numbers. It was 42 percent funded in 2011, assuming an 8 ½ percent return on investment. We have changed that anticipated rate of return to 6.9 percent. And I know people will say that that’s too high, but it’s a process to move in that direction. And to put it in perspective, at 6.9 percent we’re talking about the bottom 16 percent of public plans—municipal and state. So that is significant. So a lot of my critics say, well see, there he goes again, he just increased our unfunded portion of the obligation very substantially. But what we really did was to bring it into alignment with what might otherwise be anticipated in the future with respect to rate of return.

Connecticut’s plan started in 1939. It was a pay as you go system. Starting in the 1970s, people realized that that was a problem. Starting in 1984, they said they were going to do something about it. And when I became elected in—when I became governor in 2011, I was the first governor to fully fund the pension obligation as calculated. And since then, we’ve obviously gone through systems of recalculation. One of my predecessors, who is wrapping up his second term in prison—(laughter)—entered into agreements in the 1990s that substantially expanded the benefit for state employees at the same time he entered in an agreement with union representatives of those employees that that pension obligation and post-employment obligation wouldn’t be funded for 20 years.

I got to do that. And I don’t ask for pity, because I knew what I was doing, and I knew that that was a major part of what I would spend time being invested in individually, personally to try to resolve some of the problems for the state. But basically, pay as you go, we got a problem in the ’70s, we’ll talk about it in the ’80s, we’ll make it worse in the ’90s, and it becomes due in 2011.

LEVI: And so you came in, in 2011, and started paying in the amount that the actuaries said you should pay in. So they calculate with an 8 ½ percent presumed return initially that—and then you dropped it quickly to 8 (percent).

MALLOY: Actually, we—quickly to 8 (percent), yeah.

LEVI: That you ought to pay a certain amount in every year, and then over time things will be fine. And then actual returns came in lower than that. So while you were finally funding it, the gap grew. And then you had other looming challenges. And so, again, in the context of today’s discussion, one of the big things—or, maybe the big thing you did in this space was make a deal to change the return assumptions for the teachers—for the state employees plan. Can you talk a bit about—maybe give people a quick sense of what the deal was. But then the politics of it. I mean, this is not an easy thing to do.

MALLOY: No, it wasn’t. And the truth be told, I never expected to have a second term. And so I went at this pretty tough in the first time, expecting that that would be my only shot to make some level of progress. And I think the difference in public plans is, you know, this involves contracts and negotiations. And I’m a governor of a state that recognizes those obligations as a property right, of which I think there are six rights that recognize those obligations as property rights. So the ability to do anything without negotiation—particularly for existing employees and most particularly for vested employees—or, for vested employees, is practically impossible, unless you’re negotiating changes.

So we made a large number of changes. People have to work longer. Instead of a 3 percent penalty for retirement early per year it’s 6 percent, which probably made the largest difference in the early years of that 2011 SEABAC III state employees plan. And then including extending the periods of time in which hazardous duty individuals have to work as well. And I think one of the more important things that we did was not to be invested in ERIPs. I have refused to participate in early retirement incentives because we did a study—actually, we had the Boston College Group do a study. And we came to the conclusion that somewhere between $4.4 and $5 billion of additional obligations are related to ERIPs and agreements around those ERIPs, to go even further in not funding. So we did away with those.

Now, I hope all of those things will stay in place. Then, most recently, this past year we had two significant agreements. One was to do—to deal with what John Rowland had done—I previously referenced—in kicking the can down the road for 20 years, and then requiring, in a relatively short period of time, that the pensions become fully funded. We changed that system to get to additional contributions quickly and maintain those over a longer period of time. And in essence, wipe out what was the unfunded obligation as of when those discussions—when that kicking the can down the road was negotiated between himself and the unions privately. We’ll have that done, and then we’ll go after the remaining balance.

LEVI: And so to pause you for—

MALLOY: I know there’s a lot of stuff in there.

LEVI: Yeah. So just to get a sense, in order—

MALLOY: And then—and then we have another SEABAC agreement, which I haven’t touched, so.

LEVI: So in order to essentially catch up on the funding, you had the prospect of going from having to contribute—correct my numbers if I’m wrong—but 1 ½ billion (dollars) a year, to something like 6 billion (dollars) a year in the early 2030s, and then it was going to drop to close to zero before it—and you’ve reprofiled that so that it’s more steady and politically manageable. Is that roughly it?

MALLOY: That’s correct, except that the year I was elected—so we’ve already increased our funding on the state pension side by $750 million during the time that I was governor. Lots of folks will say he’s a terrible governor because he raised taxes. Well, the reality is that we had to raise a contribution for teachers and our contribution for state employees, very substantially. In fact, arguably, all tax increases that have been effected in Connecticut during the time that I have been governor, in any way save transportation, have actually gone to pay the unfunded portions of those obligations. So it’s a very substantial difference. Under the teacher’s retirement plan and the state employee’s plan, we had a potential yearly exposure of somewhere between $8 and $12 billion, at the end of that catchup period.

LEVI: For the combined two plans.

MALLOY: Right, which was—which was impossible. And so one of the agreements that negotiated last December and became effective was to do what you described better than I described.

LEVI: To put this all in context for people who don’t spend their days looking at Connecticut budget statements—

MALLOY: Twenty-billion-dollar yearly budget.

LEVI: OK. So 12 billion (dollars), within a $20 billion budget.

MALLOY: Easy to do.

LEVI: And $30 billion-ish asset base for the pensions with a 60-ish (billion dollar) liability. OK, just to give sort of context for all this stuff. You were able to do it—

MALLOY: Could I just say something?

LEVI: Sure.

MALLOY: When I agreed to do this, the governor of Illinois was supposed to be here so I could feel better about myself. (Laughter.)

LEVI: If we had to replace the governor of Illinois, who would have been your second choice? (Laughter.)

MALLOY: Governor of New Jersey. (Laughter.) Who has grown his obligation.

LEVI: So you were able to do a deal with the state employees, but not with the teachers, to reprofile the pension funding. Why? And what would it take to get the deal—a deal with the teachers done? Give us a sense of what makes the politics work and what makes it not work.

MALLOY: The deal will either be done this coming legislative session or the first legislative session of the next governor, because there’s no way you can take the teachers’ pension payment per year up to $6 billion. I mean you can’t do that. And what—most people in the legislature and most citizens don’t understand the difference between a million dollars and a billion dollars. And I know that that’s hard to believe. And so maybe if you’re particularly well educated, it’s a hundred million (dollars) and a billion (dollars) you don’t understand the difference in.

So these are very complex discussions to have with folks who, at the very—that just really can’t wrap their minds around how many thousands of millions of dollars are the billions of dollars that we’re talking about. So it’s very scary for them. And what’s intriguing in my state is I was the first Democrat-elected governor in 24 years. So all the things that I described to you that got done got done under Republican governors, largely, including John Rowland’s second term as governor.

And—but, you know, we have politics that—Washington politics come to state capitals pretty quickly. And so it has become a fiercely partisan, complex game on which we blame Malloy for the obligation, even though he’s fully funding it. Well, and you do that because he’s fully funding it, and that costs money. And so that’s the problem. So people really don’t want to fully fund it. They want to pretend it’s going to go away.

And if I—actually, you know what? If you keep gapping, I’m going to fill the space. (Laughter.) We have some—you know, we have some bond-rating-agency folks—because I looked at who’s here, at least if they came. I mean, I think part of the blame of what’s happened in places is the bond-rating agencies kind of took their eye off the ball and really didn’t hold local governments and state governments accountable to the degree that they should have.

So what’s happened since I began fully funding the obligation and restructuring the obligation so that it doesn’t have an eight (billion dollar) to $12 billion, you know, spike or cliff, however you want to look at it? Our rating goes down.

LEVI: And you have—and I’ll come back to this on the pension side of things—you have a national view as chair of the Democratic Governors Association. So you talk about in the past, rating agencies didn’t provide enough attention to this. Are there other sort of ticking time bombs that are going unnoticed, not in Connecticut, but elsewhere in the country, that politicians have not been forced to face up?

MALLOY: Yeah. I think that our treatment of cities in the United States post-World War II is coming home to roost. Now, obviously, you know, the Bostons and Philadelphias and New Yorks are doing particularly well. But I’m talking about a city being any place with a population of 100,000 or more.

What we have largely said since the end of the Second World War is, sure, we want people to live in cities, but we’re going to deindustrialize them. We’re going to have people living in cities pay higher taxes, have higher crime, and have a school system that doesn’t produce the kind of results we want, and it’s still going to work.

And so although we’ve realigned our thought processes about major cities, I think there are about 200 cities in the United States that are going to continue to suffer from those long-term policy changes that really came about very swiftly after the end of the Second World War. And so, in my state, Hartford, Connecticut has its challenges, or Bridgeport or New Haven or Waterbury; Stamford being the difference. I happened to have been mayor for 14 years there, and I had a fully funded pension obligation.

But I think that that’s playing itself out in state after state after state. And so I think that’s one of those unrecognized challenges.

LEVI: Correct me if I’m wrong; one last question on this deal you did with the state employees. If I understand correctly, it was approved by the union leadership but didn’t have to go to the rank and file. Is that—

MALLOY: No, I think they—the SEBAC agreement we reached in ’11—and remember, I was elected coming in with a $6.7 billion deficit on the spending—two-year spending plan. That was approved. In fact, it was turned down by the—we negotiated. It was turned down by the membership. And then a second vote got it passed.

And the second agreement, which—

LEVI: ’16.

MALLOY: —which is actually—yeah, the ’16-’17 agreement—that was negotiated and passed as well.

LEVI: I—

MALLOY: And, by the way, let me just say this. On SEBAC III, so we went from—

LEVI: SEBAC, the state employees, the third deal, 2016.

MALLOY: Right. So the third deal actually radically changes some of the assumptions. For instance, beginning in 2022, COLAs get kicked out—instead of six to nine months, get kicked out 30 months.

LEVI: What does that—what does that mean for—

MALLOY: Cost-of-living—

LEVI: —(inaudible)?

MALLOY: Cost-of-living adjustments that are negotiated and are supposed to be part of the assumption on actuarial funding.

LEVI: Right.

MALLOY: And if the rate of return is not 6.9 percent, then the employees’ contribution will go up. Active employees’ contribution to the pensions will go up. And the payout of a COLA will go down by half a point. So it’s a very significant change that takes place based on circumstances. And I think it’s the first time in Connecticut’s history that those kinds of possibilities have been built into an agreement like that.

LEVI: And that’s a really interesting element, to basically say, look, we’re not going to come to agreement on what the future is. We’re going to come to agreement on how the—at least to some degree on how the burden of good or bad surprises will be distributed in the future.

So you have this—again, like I said, this national view. When you look out, there’s almost no state that is immune to challenges on the pension-funding front; almost none.

MALLOY: New York’s—you know, has done a better job than the vast majority of states.

LEVI: Are there one or two examples where you see creative politics and policy having succeeded on this front?

MALLOY: Well, again, I’ll start with—

LEVI: Aside from having done it well in the first place—

MALLOY: Yeah, yeah.

LEVI: —it’s just tough to do now?

MALLOY: Well, I mean, I think—I think the public discourse, pensions are bad. I mean, I think we’ve jumped on this bandwagon that, you know, some house—people’s personal savings and/or Social Security are going to be enough for people to—you know, should be enough for people to live on. But that ignores the fact that the fastest group of jobs that are being created are without benefits and are low pay. So the likelihood of that coming true 40 years from now is, I think, in question.

LEVI: But the—

MALLOY: No, but let me just say this. So—but you have many communities, and this state being one, where people didn’t give away the store. I’ll exclude the transit situation. And the unions didn’t reach deals with folks that you didn’t have to fund the obligation. And those systems work. If you fund the obligation and you don’t give away the store and you don’t elect people who want to get reelected on the basis of a friendly agreement—one of my predecessors, previously mentioned twice—(laughter)—then—

LEVI: Is he in—is he in prison?

MALLOY: Yes. Yeah. (Laughter.) Then, you know, things are OK. What we have is really bad management over a 50-year period of time, 40-year period of time, 30-year period of time, in state after state after state or municipality after municipality after municipality. And that’s why we’re where we are as a nation. And that’s why we’ve just kind of short-circuited the discussion and just said, well, pensions are bad. Well, no, pensions are actually good if you negotiate a good deal and you fund it and the employee is participating in the funding. But if you give them a day off and you give the taxpayers a day off and you give people more money on a long-term basis, they’re really bad.

LEVI: So let’s stipulate that pensions are good. I happen to agree with you. Is it politically sustainable to have a public sector where people have solid pensions—well-funded, solid pensions—and a private sector where increasingly people have to find contribution plans? I think we heard in the last session half of them have nothing in them. Is that politically sustainable?

MALLOY: Probably not, and probably not for the wrong reasons. But I think the politics you’re talking about is why should someone else be better off than me? And that’s the purest kind of politics, right? I mean, let’s acknowledge that we’re unhappy that someone’s better off, and as opposed to let’s create a system that is actually going to take care of people in their old age.

LEVI: So is part of the solution to working out the politics of the state pensions to create a better policy environment for private-sector pensions—

MALLOY: I—

LEVI: —so that this is not a me or you; everyone is actually getting a reliable retirement?

MALLOY: Or alternatives. I mean, you know, in public pensions, the big talk is that you should, at the very least, have a hybrid system. Well, under Tier III we’ll have a hybrid system.

LEVI: So hybrid, part defined benefit, part defined contribution.

MALLOY: Right. And so maybe Social Security should be thought of differently. Maybe there should be—maybe we should make it substantially easier for people to save more money. Maybe withdrawals from paychecks should be automatic or at least be permitted more easily, as opposed to the roadblocks that have been put up just recently.

So, I mean, I think that we should—unless we want to end up taking care of—unless we want to go back to an America that is more like pre-1934, then we probably should start thinking outside of our political boxes that we’ve put ourselves in and have a broader discussion about how do we take care of people who are going to live longer and cost more money to sustain themselves in those longer lives, including medical treatment?

LEVI: One more Connecticut question, and then I want to take a few minutes to talk national politics before we go to the members.

So obviously part of what you’ve had to do to make these pieces work together is raise taxes. And you have been attacked for doing that, blamed for reduced—for population outflow, for business outflow. Talk to us a bit about the challenges around that and the decisions you’ve had to make. And then maybe say a word if Congress were to pass tax legislation that repealed or substantially repealed the deduction for state and local taxes, how much worse would Connecticut’s problem be?

MALLOY: Yeah, I think the Northeast and, you know, other parts of the country will be very seriously damaged by that—California, Oregon, Washington. Most of the states from Washington, D.C. on up would be adversely impacted, and some of the Midwestern states, including Wisconsin, of all places, where the speaker comes from.

So I think that—I hope that doesn’t happen. I think it’s less likely to happen every day that goes by, but we’ll see what happens. You know, this idea about who loses and who wins on the tax structure of the United States is—you know, Mississippi and Alabama do very well by our federal tax expenditures and tax policy. And places that I’ve just previously mentioned do relatively poorly in that regard.

There’s one active military base in all of New England. But you can go to Tennessee. What, are there five or six? You can go to Kansas. You know, the level of support and expenditure in states like that is really quite extraordinary. So there are lots of different ways to measure it.

If the only way you’re going to measure fairness is whether your party wins an election, I guess it gets a lot simpler. (Laughter.)

LEVI: So I mentioned earlier you’re chair of the Democratic Governors Association. You had a pretty good week last week.

MALLOY: We did—won 100 percent of our races. (Laughter.)

LEVI: Congratulations.

MALLOY: That’s the first time since 2005.

LEVI: So what lessons do you take from last week, and what lessons do you take heading into next year?

MALLOY: I think the biggest takeaway is the power of women. Women are voting in ever-increasing numbers as a percentage of the total vote. I think the extraordinary turnout in a by-election, not just in New Jersey and Virginia, which were extraordinary turnouts, given the New Jersey race was never close and the Virginia race perhaps was thought to be close, but I’m not sure it ever was all as close as it was purported to be. I think Washington helped us gin up the participation rate there.

I think people are angry. I think they’re frustrated. I think—and they decided to show it in a way different than they had previously done. If you’re angry and frustrated, frequently you’ve stayed home. Or, in the last presidential election, you came out and voted for Trump. In this election cycle, and not just in those two states, you came out and voted the only way you could against the regime, and that was to support Democratic candidates.

We had a great night in state after state after state. In my own state, where I’m very unpopular because I’ve done the things that we’ve talked about doing, Democrats picked up, I think, 16 towns as being led by Democrats. Out of—out of 169, we saw 16 or maybe even 17 switch hands. So it was a very substantial election for us. And we learned things about how to motivate people to vote.

LEVI: Are there any incorrect lessons that you are worried about Democrats taking from last week?

MALLOY: I think that every election is a different election, as ’16 and ’17 have proved, and we shouldn’t assume ’18 will be a replay of ’17 any more than ’17 was a replay of ’16. So I think that’s one of those things. I think what you have to do is build on a system of communications with your voters that is more likely to get them to turn out at the polls in these bi-elections.

You know, we don’t have any problem in turning people out, by and large, at a presidential election. Every other election in between is more difficult than that election. And I think, you know, ’18 is going to be interesting. But if you look at the number of retirements on the Republican side, it’s going to be a very—it’s going to be a more competitive race than we would have thought six months ago.

LEVI: Before we started, the governor told me that he was the youngest of eight children and the shyest and most retiring of them.

MALLOY: (Laughs.) Sure.

LEVI: I would like to meet the others, Governor.

Let’s now go to members for questions. Please put up your hand. I’ll call on you. Someone will bring a microphone. Please wait for it. Say your name and affiliation and a brief question. And we will try to get in as many as possible.

Gentleman here.

Q: Thank you.

Governor, thank you for being here. My name is Pug Winokur. I’m a Democrat from Greenwich; not moving to Florida like many of my friends.

Given that you saw this problem when you arrived, could you talk about whether you gave any thought to a substantial effort to use the bully pulpit to explain what the benefits were, where the benefits might be a little out of line, what the funding strategy was, and to really bring a lot of people on board? I mean, shame on me, having lived in Greenwich and not until recently understanding the details here.

MALLOY: Yeah. You know, I tried. I think you might find this hard to believe, but you don’t represent the general population of the United States of America. (Laughter.) Nor do the institutions that most of you graduated from represent the rest of the population.

So I think you make an effort. But, quite frankly, we’re so far underwater that we really had—you know, it’s—we’ve got to keep getting the water out of the boat, and probably got caught up in that. I think that perhaps we didn’t communicate it as well.

But I will say this to you, that I became governor in 2011. The number of reporters covering state news in that period of time is down anywhere from a third to two thirds across the United States. So getting a Connecticut story out or—I’ll exclude New York, but getting a Connecticut or a Maine or a Vermont or New Hampshire story out is quite, quite difficult. And that’s for people who read.

Well, no, let me just—

Q: (Off mic)—in Rhode Island—(off mic).

MALLOY: Sure. Well, Rhode Island, the governor didn’t do it, quite frankly. You know, the treasurer did it. But, for instance, our 2011 deal was a better deal than Rhode Island had done two years prior to that. But everywhere I went, they said, well, why don’t you get the Rhode Island deal?

LEVI: So for people who aren’t that familiar, what was the Rhode Island—

MALLOY: It is a little bit of everything that we did and a little bit less. So the work periods were not extended as long. And there are all kinds of things that are there. But, by the way, she did—she’s a friend of mine. She did a great job, and she did it before other folks were effecting those kinds of changes in Democratic states. So I’m a great admirer of her. I’m not knocking her at all. And certainly she’s one of the governors we’d like to see reelected next year.

LEVI: In the very back there.

Q: Hi. Kim Davis, Charles Bank Capital.

Could you go back and talk a bit more about the rating agencies? Is it your perspective that they just did bad analysis, or did your predecessors obfuscate the facts so that they were not able to essentially have the right inputs?

MALLOY: I think they did a bad job, quite frankly. I think they held Connecticut state government to a lower standard than they held my local government, Stamford, for instance, where I had been, you know, on boards and commissions or mayor for, what, 25 years. And I think they were more than willing to look at other things—how many more jobs came into the state or how low the tax rate was or other things, just assuming that, sooner or later, someone would resolve this problem. And, by the way, let’s not look too seriously at what the problem is.

So I would honestly tell you that they were a lot harder on a Bridgeport, New Haven, or Hartford than they were on state government. And I’m not sure there was that big a difference between the two.

LEVI: So were they basically making political assumptions about the future, about how pieces could be put together that were untenable, or they were just ignoring?

MALLOY: You know, I’d like Connecticut’s rating to increase at some—you know, improve at some point. (Laughter.) So I have to choose my words on behalf of my successor. But I just think that—I said this at a bond luncheon I spoke at. I think that if the term that you were analyzing was 40 years or 50 years, as opposed to 20 years, then people would have looked harder at these issues for state governments.

But because—because you were selling paper that was going to be refinanced or paid off over a 20-year period of time, it became incredibly easy to look the other way. That’s what I think.

LEVI: Please.

Q: Stephen Blank.

Connecticut, as you mentioned, is scarcely alone in this—the pension-crisis problem. Do you see this, on a national basis, moving toward a significant fiscal crisis at a particular point? Or will there be a more gradual emergence of problems? And secondly, are there federal policies that you would recommend to confront this, again, on a federal basis rather than state by state? What would you do if you were in charge?

MALLOY: Well, that’s like five or six questions. So let me try to handle some of them, and you’ll remind me of the ones that I didn’t.

I think that there is a reality that there is an anti-pension bias and that I think, on a party basis, one of the reasons that some Republicans dislike me as much as they dislike me is I may have headed out—headed off the disaster that they would have used as the basis to destroy the system, pension system. I think that’s a very real analysis, quite frankly.

So I’ll go back. I referenced New Jersey. Now, New Jersey came to a political agreement—what was it—four years ago, five years ago, before the reelect—before the reelect—came to an agreement and got Democrats to agree with the governor to make some changes in the pension—long-term pension trajectory, except that on a short-term basis, three years, the debt would grow by close to $3 billion while it wasn’t being—while that agreement wasn’t being funded; a little bit—a little bit like what John Rowland did over a 20-year period of time, who is in jail. (Laughter.)

And I—listen, you know, the governor of New Jersey and I have had our differences. We’re very different people. But I’m not sure that that was a mistake on his part or an oversight. I think that this anti-pension bias is actively at play in state after state, and the Republican Party has adopted that as a strategy. If the problem is too big to fix, then destroy the system. And Democrats perhaps—now, full admission, my mother was a school nurse. Her benefits, you know, paid for her two years that she survived in retirement, but paid for the benefits of a lot of kids, all eight of us, while we were growing up, and she had a pension. So I think that’s part of it.

The rest of what you were trying to say, I probably have—

LEVI: I think the broader other question is, is there any federal role in helping the states work their way out of this?

MALLOY: I think they—I think—well, here—OK, so states are not subject to the same regulation that private pension plans are. And that’s a mistake, by and large. And that’s one of the reasons the rating agencies looked at them differently. It’s one of the reasons that people weren’t blowing the whistle sooner. It’s one of the reasons, with the exception of New York, which has great language in its constitution about funding pensions, it’s one of the reasons that this bad behavior was committed to in so many states.

LEVI: You painted the state-by-state differences in fairly—in fairly partisan terms. Are there Republican governors who you think are doing a good job on this?

MALLOY: You know, I—

LEVI: Probably ones who aren’t up for reelection next—

MALLOY: Yeah, yeah. No, I mean, I think that a lot of this has to do with how old’s your population, how old’s your state, how old’s your infrastructure, which are competitive expenses; let’s be honest. And so I think there are a lot of differential—and, by the way, is your state growing—southern states, western states—or is your state shrinking? Northern states, eastern states.

You know, I mean, I think there—so there are these other non-political differences, quite frankly.

LEVI: Sir.

Q: My name is John Biggs. I’m former chairman of TIAA-CREF, a pension system. Also I’m an actuary. I started out in life as a pension actuary. And to show how old I am and how quaint it was, as an original pension actuary setting up defined-benefit plans, we had a 4 percent interest assumption. This was back in the early ’60s.

Later in life I went on audit committees at some major companies and fought hard to get the rate down from 9 ½ percent to 7 percent. I mean, and I’m always baffled. How did that move over time? And what were the responsibilities of the audit firms and the actuarial firms? They were key people. I’m not aware—in fact, when I was working at the corporate level, trying to get—I mean, rates there were as absurd as they were in the states, and still are.

MALLOY: Well—

Q: The accounting profession gave no support whatsoever. They were perfectly happy with 9 ½.

MALLOY: So the motivation was greed. If you raised the expected return on investment, you got to fund the plan less. That’s what it was. And it was that for state government, local government, and ERISA coverage. I mean, that—it was greed.

There are certain themes in life that repeat from time to time, and human greed is one of those. And human greed, unchecked by some appropriate level of regulation, produces those kinds of things. And that’s what’s played out.

LEVI: It took a heroic effort to get from 8 ½ to 8 to 6.9. Is 6.9 low enough?

MALLOY: I don’t know whether it’s low enough. I mean, I think now I will say that we did have periods of time with better returns. I mean, I didn’t bring my chartbook in here, but I could show you—

LEVI: Had great returns last year. Top—

MALLOY: Right. Yeah, but you know, in ’11 we had a .3 percent return. And I think in—

LEVI: ’16 was similar.

MALLOY: Yeah. So ’16 would have been similar; ’15-’16, yeah. So is it low enough? I don’t know. But you can only—listen, I can’t get the state legislature to agree that 6.9 is the right return rate to expect for teachers. So, I mean, that was in my budget this year, which they wouldn’t adopt. So, you know, I’ll take the credit where I can get it and I’ll take the criticism when I leave.

LEVI: Near the—near the back.

Q: I’m Allison Schrager, and I’m a journalist at Quartz. But I’m also a pension economist.

And it seems like underfunding defined-benefit plans is more of a feature than a bug, because, like, in the private sector, once you had ERISA and private plans had to actually realize the cost of assuming all the asset and longevity risk, that’s why they got rid of them.

Do you think if you had similar standards in the states, the taxpayers would tolerate how much their taxes would have to go up to properly fund pensions?

MALLOY: Only for four years at a time, maybe eight. I think that we have proven ourselves capable in the United States of electing people who we, A, want to lie to us, and do it successfully. And so my predecessors lied, and they didn’t tell lies that people didn’t want to hear. They told the lies that people wanted to hear. And that is a frailty of human beings, that they will always take an easier way out.

And then, every once in a while, somebody reminds you of the dangers of that and you change your behaviors for a period of time. Maybe you change them permanently. Maybe you set up a system like how are your bonds written to protect that debt, at least as issued, from the mistakes that governors or legislatures would—not mistakes—the behaviors that they would engage in.

So I’m a big believer that we can prevent that from happening, but it does require a certain extent—a certain amount of discipline and regulation. And, you know, that’s what I would say.

LEVI: Mark.

Q: Mark Christopher, Blackpeak.

In a sense, this question builds off the last. It’s a generational question. The next generation of politicians and union reps are going to be renegotiating deals that the previous generation had created, and the next generation of taxpayers is going to be paying into these plans.

What do you think is the right way to—for politicians, maybe, or in the public discourse, to speak about the intergenerational nature of pension obligations?

MALLOY: So I’ll try to answer that. And if I haven’t been clear before, I think employees should be paying more for their post-employment benefits, including pensions. I think governments should be properly funding their share of that obligation. I think it should always be assumed to be part of the—that relationship is part of the overall compensation package.

But what one of my predecessors did was to convince the public that that was no longer the case, that pensions and post-employment was one thing and giving people raises was another thing. And so I had to do that, but I also had to give them very sizable raises.

You know, I think there were just a lot of bad behaviors that were engaged in. And I probably haven’t said this sufficiently. Unions did a bad job of protecting their members, because they were—if they required government to fully fund the pension obligation as they should have, they would have gotten smaller raises on a per-year basis. So they were willing to cut the deal as well. And that’s particularly true in my state. So both sides made terrible calculations that have not inured to our benefit.

So I don’t know how you—I don’t know how you change the system sufficiently to make sure that no one can do that again, but I’m trying.

LEVI: Do you see a difference in attitudes toward the policies you’ve tried to pursue among different generations? Are young people—do they see it as taking money from them to pay people who are already retired? Are they more—are they more individualist, more communal?

MALLOY: I mean, I—

LEVI: Difference?

MALLOY: I haven’t seen a poll recently. But, you know, as of, you know, 14 months ago, most millennials didn’t think there’d be any money in the Social Security system to pay them anything, and most of them are working for someone who doesn’t have a pension, which means they’re all anticipating living on air.

LEVI: And so that makes them probably less favorably disposed to paying for other people’s pensions?

MALLOY: I think to an extent. I will also tell you that when you push the numbers around and when you—a lot of this is how you ask the question. If you ask the question, do you think we should destroy people’s pensions and put them out on the street when they turn 67, the answer is no, we don’t think you should do that. But if you ask it a different way, they’ll say—do you think public employees are paid too much and have too good a retirement and don’t work long enough, and the answer will be overwhelmingly yes.

I mean, a lot of it is how do you ask the question? And then what do you do with the piece of information based on how you’ve decided to ask the question? And some people do a better job with that than others.

LEVI: Please.

Q: My name is Bhakti Mirchandani, and I work for a hedge fund.

You’re not the only state with a pension plan that’s under enormous pressure. And at the same time, following the news, there’s increasing coverage of ESG investing, economically targeted investing. So, in a way, these may constrain the types of investments that you can make. And in another way, they may mitigate the risk. But given the enormous pressure that your state is under, how much of a priority are these types of issues as you think about your state’s future?

MALLOY: Well, there’s a historic note. I’ve referenced the governor. We also had a state treasurer who went to jail. (Laughter.) And as a result of his sojourn, Connecticut did not invest in private equity for a long period of time when there were extraordinary returns in private equity.

And so I think you have those periods where some forms of investment will pay better. Some people will make decisions about where they have employees, based on one set of factors versus another. I think those things are going to play themselves out, regardless of who we are and what we are.

But I’ll go back to the idea. I want to live the rest of my life where my grandchildren are. And that will be—it won’t be—I won’t determine where I’m going to live the rest of my life based on the tax structure of the state. It’ll be based on where my grandchildren are. And so we’ll see what human behaviors do to all of those changes that society or the investment community produce.

LEVI: You—Connecticut has more in common with Illinois than I had previously appreciated. But I want to follow up on that last question. I mean, do you see pressure from stakeholders to screen out certain kinds of investments, to direct investments, whether it’s fossil-fuel divestment or broader ESG?

MALLOY: Let me—the comment about Illinois. There are similarities and there are great differences. And so I can’t let that go. (Laughter.) Our constitutions are very different. Our laws concerning the ability to negotiate on a post-employment basis are very different. So, I mean, I know you meant it as an aside, but that’s not company I want to keep.

LEVI: Yeah. No. (Laughter.) I’m talking historically.

MALLOY: OK. All right. Yes, we’re both old industrial states.

LEVI: It’s also—

MALLOY: And we didn’t have coal. So I don’t know. I just—I lost myself in my response to your—

LEVI: No—

MALLOY: —your jibe.

LEVI: The question was, do you come under meaningful pressure from stakeholders, from citizens, to exclude particular investments for ethical reasons, to shape your investment portfolio? Is that a material issue for you?

MALLOY: I mean, I think that—you know, let’s look at—you know, if we’re talking about South Africa in the ’80s or ’90s, certainly it played itself out. If you’re talking about more recent attempts to exclude investment, I don’t think it’s been as strong. We have a state treasurer who I think has her own set of criteria for who she invests with. But she’s the treasurer and she gets to decide those things.

LEVI: And you’ve also done some, I’d say, awesome stuff in the positive side, setting up Green Bank and whatnot. That’s a subject—

MALLOY: You mean the world’s first successful green bank?

LEVI: I mean the world’s first successful green bank.

MALLOY: Which has a—

LEVI: The subject of—

MALLOY: —return on investment of eight dollars for every one (dollar)?

LEVI: Really?

MALLOY: Yeah.

LEVI: How much capacity? Can I get in?

MALLOY: Yeah.

LEVI: Sir.

Q: Hi. Can you discuss Aetna’s decision to relocate from Hartford to an even more expensive location, and maybe the conversations you had with Bertolini around that?

MALLOY: Hey, listen, I’ve been on the winning side and losing side of those processes. I mean, I was mayor of Stamford for 14 years. And before that I served on the board of finance for 11 years before that.

So, listen, the number one factor on where a company’s headquarters is, at least their executive offices, is where does that person who heads the company want to live. I mean, let’s be honest. You know, we had another—you know, we had another relocation, which was GE. Now, knowing about GE, what we’ve learned—(laughter)—there may be another motivation, and that is that, you know, we’ve got to look at other things before we look at other things. And we have to consider—

LEVI: Can you expand a little bit on—(laughter)—

MALLOY: Yeah. Yeah. Well, listen, I think that sometimes you make changes just in the hopes that that change will be what shakes up your leadership team. And sometimes you make changes because you like being in a particular community and where you recently spent more of your time over the prior two and a half years than you had in the other place.

LEVI: Please.

Q: You—

MALLOY: Oh, actually, can I just stop a second? And Connecticut did a bad job of reinvesting in its cities. I’ll take this back to what I said actually very early on in our conversation. Connecticut’s done a terrible job in investing in transportation. It’s done a terrible job of working with its private and public universities on economic development. It’s done a terrible job on having housing policy that made life in those cities more affordable. And with the exception of lower Fairfield County, it did a terrible job of inviting out-of-state transference or creation of jobs in the state.

So that—that played itself out, as I said, in Connecticut over the post-World War II period of time until relatively recently. And remember that most Americans were fleeing cities until about 1993 or ’(9)4, before people decided to reinvest and revisit and live in those places. So there are other things, you know, playing themselves out.

And I think New York’s done a good job of reinventing itself since the early 1980s. I was a prosecutor here in New York City from 1980 to ’84 over in Brooklyn. I was over in Brooklyn last night. There’s a world of difference. There’s a world of difference in Manhattan, my old neighborhood on 83rd Street, between East End and Newark.

You know, so I think there are communities and states that have done a better job in reinventing themselves. And they also get rewarded for that.

LEVI: One of the flip sides of the coin on the question of returns—I’ll go to you after I say one quick other question—is investors finding new opportunities. And one of the areas that has gotten a lot of talk but not as much action is infrastructure. You’ve made a push in Connecticut to expand public-private partnerships, but it’s been tough. Can you just tell us a little bit about that?

MALLOY: Well, private—you know, public-private partnerships just aren’t taking off in the United States. I mean, we can always—we can all think of one or two, you know, amazing successes, but the reality is there’s precious little being developed that way in the United States.

And I think part of that is how municipal and states—municipalities and states raise their money. They raise their money—now, I’ve been critical of the bond-rating agencies for past practices, but they raise their money in a very transparent way. And 3Ps aren’t terribly transparent.

So if you’re a congressman or a council member or a mayor, do you raise your money in a very transparent way, and therefore not get criticized, or do you enter into a transaction which, by design—and I think this is a mistake—but by design is not terribly transparent? And the easy answer for city council member after city council member is to raise their money in the old traditional way.

And so I think that’s very different than Australia. It’s very different than Canada, where public and private pension systems are actively engaged in raising their future returns that way. And for whatever reason, the promoters of 3Ps haven’t figured that out. And I think it’s—and this is not the first time I’ve said it, and, you know, I get ignored at home. I might as well get ignored in New York. I think until 3P—until we can explain them better to the general public so that a city council member will take a shot at it, then we’re not going to see 3Ps take off in the United States the way they have in Canada and Australia, period.

Q: You already mentioned you have a large funding gap. Ultimately, it’s going to be covered over the decades. You said you could do it by higher contribution from employees, higher contribution of the states. You could also do it by reduced deficits. Say, for every dollar of funding gap, where is it going to come from across these three options?

MALLOY: Well, I think that one of the great struggles for states that are trying to do the right thing is what expense do you squeeze out, right? So do you put less money into higher education? The Connecticut legislature has decided to do that. I’m not in agreement with it, at least to the extent that they did that, but that’s an agreement that they reached.

So I think that even as we take the obligation that might have been $12 billion and grow it on a nearly contribution for a period of time to $4 billion, that’s going to squeeze out, from where it is now, at $2.4 billion. That’s going to squeeze a lot of things out in a slow-growth economy. And we are in a slow-growth economy. There are exceptions, and New York City and Boston are exceptions. But upstate New York is not an exception. You know, I could give lots of other examples. Springfield is not growing as fast as Boston is. So these are not universal rates of return that are changing even within states.

So, yeah, what gets squeezed out, I think, is going to be the problem. But when we first met in the holding room, you referred to Connecticut’s—or someone’s reference to an unsustainable. It’s sustainable, at least if they make the changes on the teacher side that we’ve already made on the state employees’ side. It’s sustainable. That doesn’t mean it’s without pain. Going to a 12 (billion dollar) or an $8 billion per-year payment, that was unsustainable.

LEVI: You have 14 months left; still plenty to deal. But you must be thinking about what your successor can get done in this space. If you had one piece of—if you have one piece of advice that you expect to leave your successor with in addressing the set of challenges we’ve been talking about, what is it?

MALLOY: Well, I’ve done such a poor job as governor that there are currently 30 people running for governor. (Laughter.) So—

LEVI: You’ve made it look so fun.

MALLOY: And I think eight of them are self-funders. So I—you know, listen, I hope that we’ll—there’s no one thing. You know, I hope that Connecticut will invest in transportation, because we’re clearly at a deficit to New Jersey, New York, and Massachusetts on transportation. I hope Connecticut will invest in its urban environments to a much greater extent than it has. I’ve pushed that investment, but not as far as I would have liked to have gotten it, because I think millennials and other groups that’ll follow millennials want to live in cities. But you have to give them a good city to live in.

I hope that we’ll be as interested in urban education as we’ve always been in the education of kids in Darien or Greenwich or Westport. I hope that we’ll stop writing off significant portions of our population because of where they live, their ethnicity, or their color. I hope—and I hope that some of the changes that we’ve made will continue and be improved upon; so go back to your—whether it should be 5.5 as opposed to 6.9. Both are better than 8 ½.

So I hope—and I hope that people will become governor with the expectation that they’re not going to have a second term, and do, to the greatest extent they can, the right thing on their first term. And if you get a second term, that’s great. And if you don’t, that’s great too.

LEVI: Wise words. Governor, thank you for joining us today. (Applause.) Thank you for your service.

MALLOY: Thank you.

LEVI: Do we have a break before the next session? We have a 15-minute break, and we will be back here for an excellent final session at half past three.